COMMENT: The end of Poland's "Golden Age"

By bne IntelliNewsSeptember 3, 2014

Mark Adomanis in Washington -

Since the collapse of communism, Poland's economy has fared better than any of the other "new" members of the EU. It's true that Poland started off as marginally poorer than the Czech Republic or Hungary, and so it has a relatively large "base effect," but ever since a brief transformational recession that accompanied the introduction of market reforms, Poland has grown steadily. In fact, Poland's economy has grown every year since 1992. Famously, it was the only member of the EU to avoid recession during the global financial crisis (though in reality this was primarily a story about exchange rate flexibility rather than government economic policy).

Although sometimes overlooked in favour of larger and more exotic emerging markets, Poland has found a number of increasingly vocal supporters in the Western business press and, especially, amongst conservative political circles. The Economist recently published a report titled "Europe's Unlikely Star," and the country has received even more laudatory coverage from outlets like The Wall Street Journal and National Review.

While some of this coverage verges on the hyperbolic (The Economist solemnly intoned that "It is hard to think of any country in Europe, rich or poor, that can't learn something from Poland"), Poland has genuinely had a pretty remarkable string of economic good fortune.

When it first embarked upon market reforms in the early 1990s, Poland's per-capita income was at 30% of Western Europe's. Today, after more than two decades of solid growth, it is at 62% and rising. You have to go all the way back to the 16th century (!) to find a time when Poland's level of income was comparably high. In a recent report, Marcin Piatkowski, an economist for the World Bank, predicted that Poland's convergence will continue and that by 2030 its per-capita level of income will have reached 80% of Western Europe's. Poland, in this reading, will in very short order move from Europe's periphery to its center.

Unfortunately, there is a significant omission from this optimistic and stirring tale: Poland's woeful demography.

Numbers

Like other countries in Central and Eastern Europe, Poland experienced a grievous decline in births during the 1990s, with a more than 40% decrease in average fertility. In comparison to Russia, the decline in Polish fertility was more gradual but longer-lasting: it took several more years for births to bottom out and for the fertility rate to start ticking back upwards. Strangely, though, ever since the global financial crisis, at a time when Russia's demography has rapidly improved and when its economy was experiencing robust growth, Poland's fertility has continued to deteriorate. In 2013 Poland's total fertility rate (TFR) of 1.25 was only marginally higher than the all-time low it plumbed in 2003 (Russia's TFR, by contrast, is currently at a level of 1.72).

So far, this decline in fertility hasn't had any impact on Poland's economy because the children born during the 1990s were too young to be in the labour force. With the passage of time, however, that is starting to change, and the result will be an unstoppable (and significant) decrease in the size of the labour force. According to the latest forecasts from the US Census Bureau, Poland's labour force will shrink by 20% over the next 25 years. Since the population as a whole is only forecast to shrink by 10%, this means that Poland's retirement and pension systems are going to face enormous strain as the ratio of workers to retirees becomes steadily less favorable.

From boost to drag

Does this mean that Poland is a future catastrophe? No. The country has been blessed with good economic decision-making and adept policy formulation (along with quite a lot of EU structural adjustment funds), and it is likely that it will find a way to muddle through the demographic challenges in its path.

It does mean, however, that we should restrain our enthusiasm for the "Polish miracle," because it's likely that the gaudy growth rates of the past 20 years will no longer be achievable. The positive structural forces that helped propel Poland forward (a decreasing share of dependents in the population, a youth bulge from the relatively high fertility cohorts born in the 1980's) will shortly reverse course. Demography, in short, will go from being a boost to a drag. And if for some reason you doubt the strength of negative demographic pressure, just take a look at Japan.

In closing, since Poland's population is substantially older than Western Europe's was at an analogous stage of development, it will likely find future growth more difficult to achieve. It will probably be able to continue its path of convergence with Europe, but it will slow noticeably.

Mark Adomanis is an MA/MBA candidate at the Lauder Institute at the University of Pennsylvania. He regularly contributes Russia-related writings to a range of outlets such as True/Slant, Salon, Forbes and The National Interest.

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